Dorchester Minerals, L.P. — Q3 2011 Form 10-Q
Business and period: Quarterly report for the three and nine months ended September 30, 2011. Dorchester owns oil and gas mineral, royalty, overriding royalty, net profits and leasehold interests across 25 states. Financial figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $18.326 | $16.467 | $49.049 | $46.262 |
| Operating income | $11.469 | $9.517 | $28.979 | $26.367 |
| Net earnings | $11.506 | $9.536 | $29.016 | $26.394 |
| Net earnings per common unit | $0.36 | $0.30 | $0.91 | $0.84 |
| Operating cash flow | $14.892 | $15.307 | $42.506 | $42.892 |
Q3 operating margin was approximately 62.6%, versus 57.8% a year earlier; nine-month operating margin was approximately 59.1%, versus 57.0%. Costs and expenses were $6.857 million in Q3 and $20.070 million for nine months. Depletion and amortization was $4.817 million and $13.640 million, respectively.
- Cash and liquidity: Cash was $15.739 million at September 30, 2011, up from $11.253 million at year-end 2010. Nine-month operating cash flow of $42.506 million was largely offset by $38.014 million of distributions; investing cash outflow was $6,000.
- Debt: No borrowings are reported. Total liabilities were $1.593 million, mostly current payables; the partnership agreement generally prohibits indebtedness above $50,000, other than trade payables.
- Capital returns: The Q3 2011 distribution was $0.455546 per unit, payable November 3, 2011. Nine-month distributions paid totaled $38.014 million.
Changes and operating drivers
Revenue rose 11.3% in Q3 and 6.0% for the first nine months. Common-unit earnings increased 21.1% and 9.9%, respectively. Management attributed the gains primarily to higher oil prices and increased oil and gas volumes, partly offset by lower lease bonus income. Royalty-property gas volumes increased 12.3% in Q3 and 19.7% year to date; oil volumes were up 4.9% in Q3 and approximately flat year to date. Royalty-property oil prices increased, while gas prices declined. Operating cash flow was down 2.7% in Q3 and slightly lower year to date, principally due to reduced lease bonus receipts.
The Minerals NPI reached cumulative net profit status at September 30, with approximately $382,000 cumulative net profit and an approximately $370,000 payment to Dorchester in October. Its activity was included in consolidated financial statements for the first time; management cautioned that the cumulative results do not indicate whether future NPI payments will continue.
Outlook, risks and contingencies
No quantified earnings or distribution guidance is provided. Management expects sufficient funds to cover expenses and says it does not anticipate debt or hedging activities. It expects gradual increases in operating costs as facilities require more repairs and reservoir pressure declines. Development costs and timing of related revenues are uncertain; some properties may never produce hydrocarbons.
- Results are exposed to volatile oil and natural gas prices, production volumes, development activity and regulatory changes. The partnership does not plan to hedge commodity-price exposure.
- A royalty-underpayment claim against the operating partnership remains pending after a June 2011 partial summary judgment in its favor. An adverse final outcome could reduce NPI receipts. Other disclosed proceedings are not believed to have a significant financial effect.
- Reserve estimates and the full-cost ceiling test involve significant judgment; downward reserve revisions or lower prices could lead to a noncash impairment charge.
- Development in the Appalachian Basin may be constrained by unresolved regulatory issues relating to high-volume hydraulic fracturing.
Investor verification checklist
- Verify subsequent Minerals NPI payments and whether its payout status produces continuing distributions.
- Monitor the royalty-underpayment litigation and its potential impact on NPI receipts.
- Track realized oil and gas prices, production volumes, and lease bonus income relative to the period’s results.
- Review reserve revisions, ceiling-test headroom and future depletion or impairment effects.
- Confirm distribution declarations and operating-partnership development spending.